Beating Broke

How to Recover From Bad Credit

April 13, 2011 By Shane Ede 7 Comments

If you’re one of the millions of people that has been negatively impacted by the global financial crisis, then you may find that your credit rating has suffered. Realize though that no amount of good advice can be a replacement for responsibility. Living within your means and giving a proper amount of deference to your financial situation will always be better than trying to pick up the pieces after a meltdown. Still, a lot of responsible people have been suffering lately due to no fault of their own, and if you find yourself in this group you will be able to reestablish your credit and recover. In this article we explore what options you have available to recover from bad credit.

Apply for a Secured Credit Card
These types of credit cards require that you keep some collateral, typically $100-$500 in an account. The nice thing is that after about a year of doing this you can upgrade to a regular credit card. Make sure to check for any hidden fees and that the issuing lender reports to all 3 of the major credit agencies before you apply.
Make Sure All of Your Debts are Paid Off
If you have recently been denied credit then you are entitled to a free copy of your credit report from one of the three major credit reporting agencies (Experian, Equifax, and TransUnion). These agencies also offer a one-time deal, so if you can, take advantage of that as well. Make sure to pay off any outstanding debts and to challenge anything on there that you did not legitimately incur. It is also possible to write the lenders asking for forgiveness, and have them remove bad marks against you, but it’s not quite standard procedure for them to do so.
Watch Out for Phony Credit Reduction Scams
There are some legitimate non-profit credit counseling services available that can act as a middle man in dealing with creditors and help you to reduce your debt. There are also a ton of scams out there that will do nothing but put you deeper into debt. Make sure to thoroughly research these types of services before using them.
Get a Small Loan to Help Build Your Credit Further
Once you are able to reestablish a line of credit, and are paying it off on a monthly basis, don’t expect lenders to just automatically open their coffers to you. Factors they will take into account typically include your monthly income to debt ratio, how much debt you have tied up in high interest accounts, how much savings you have, your credit history for the last 7 years, and other issues related to stability like the number of residences you’ve had.

Make sure to explain the circumstances that lead to your financial troubles, and don’t forget to mention things like you were 1 of several thousand workers to be laid off at your job, or that the company has gone out of business. The better you are able to show the lender that you are financially responsible, the better luck you will have at getting a loan. Once you’re on the road to recovering from bad credit, learn how to build and use good credit.

Saving Money with PaperBackSwap

April 11, 2011 By Shane Ede 6 Comments

I like to read. A lot. Not as much as some people, but I still manage to read somewhere between 30 and 40 books a year. As you can imagine, that gets a little bit expensive if you’re paying full price for all of them. Swapping and borrowing books only gets you so far if you limit it to the people you know directly. But, that’s where a fun site called PaperBackSwap comes into play.

Here’s how it works. You post the books that you want to trade away. Other users request those books and you ship them off. You can either print the postage directly through the site, or buy it anyway you like. Personally, I use paypal shipping because it’s slightly cheaper, and, I already have the account at paypal to do that. Once you’ve shipped the book, or books, off, you merely wait for them to be received. Once received, the person you sent them to marks them as received and you get a credit.

With your credits, you can then request books from other members. (note: the first person from your household to sign up for PaperBackSwap gets two free credits when they list 10 books) Then, it’s just the same process, but with you being the receiver rather than the sender.

I’ve been a member since 2009. I’ve sent 71 books out, and I’ve received 59 books. I’ve only had one of the books that I sent disappear in postage, and one other that was damaged in postage. Every other book I’ve sent has safely gotten where it was going and was accepted by the receiver. The same is true of receiving books. I’ve never had one get lost, and only had one that was damaged. It’s a great community of readers, and a great source of books.

The selection of books is usually pretty good. As you would expect, most of the newer books are a bit hard to get, but you can throw them on your wish list and the system will email you when one becomes available. If one on your wish list becomes available, you’ve got two options. The default is that PBS will put it on a 48 hour hold while it waits for you to either request it or decline it, or you can put it on auto-request which will automatically request it from the other member as soon as they list it.

If you’re an avid reader (or, really, even a more casual reader) you really should check out PaperBackSwap. It’s great, frugal, way to get books to read, and a great way to share great books with others too!

How Banks Make Their Money

April 4, 2011 By Shane Ede 5 Comments

There’s been a lot of talk about the recent legislation that affects the interchange rate, and how that will affect the fees and rewards that we currently get from banks. So, I thought it would be fun to take a look at how banks and credit unions make their money. What exactly is it that gives them the revenue to pay the bills. It’s one word. One that many of you who are investors will recognize. Margin.

Specifically, rate margin. A quick definition for those that aren’t up on their financial jargon. Margin is the difference between two things. The space (difference) between the print on the newspaper and the edge of the page? Margin (or gutter depending on your profession). So, when I talk about rate margin, I mean the difference in rates. Clear as mud? Ok, some more detail then.

In order to lend money out to consumers, a financial institution must first have money. They get that money by taking in deposits and by borrowing money from other institutions. In most cases, they have to pay some sort of interest to either the depositor or the other institution. They then take that capital, and lend it out to consumers at a higher rate. The difference is their margin. Let’s look at an easy example. A bank has a simple savings account that is paying 0.25%. They have 1,000,000 in deposits at that rate. They then lend that money out to consumers at an average rate of 5.25%. They have a margin of 5%. They’ll pay $2500 in interest to the depositors and receive $52,500 in interest from the borrowers for a revenue of 50,000.

Obviously, that’s a small example. Many banks and credit unions operate at a much higher level. Wells Fargo, for instance, had $93,240,000,000 in gross revenue in 2010. Not all of that is from lending interest, but a majority of it likely is.

In truth, the revenue from interchange rates is rather small as a percentage of overall revenue. And changing it directly isn’t going to bankrupt any of the institutions. However, there is some truth in the claims that it will likely mean the end of the rewards and cash back cards as well as some of the other perks like free checking. Many of the institutions use that interchange revenue to pay for the rewards and cash back and to cover some of the costs of other perks. Reducing the interchange amount means that the institution will have to drain money from other revenue streams to continue the programs, or shut those programs down.

This is where banks and credit unions will become differentiated over the next years. Banks operate as for profit entities. They have shareholders and owners who they must perform for and who expect them to make and increase profits each year. They’ll be much more hesitant to drain from other sources to pay for those programs. Credit Unions, on the other hand, are a not-for-profit entity. They aren’t designed to make a profit. While some may cut back on those programs, many will simply continue them. Because they don’t have shareholders and owners that are demanding profit, they can cater to the owners of the Credit Unions, their members.

What it also may mean, is that we will have to be extra vigilant in watching our accounts for missing rewards, and for extra fees. If pressure to keep the programs is significant enough, some of the institutions might reduce savings rates further, or increase loan rates to try and increase their margin and help pay for the continuing programs.

photo credit: MyTudut